Educational Articles

Activision Blizzard Looking to Get a Cut of the Action

Reuben Gregg Brewer
| July 03, 2012

Activision Blizzard (ATVI) is a leading video game publisher. It isn’t known for the types of games that some people play on Facebook (FB) that are so popular today, though. It’s known for making games for hard-core players. The types that go out and buy computers especially configured for playing games—fast graphics, big screens! A common perception is that gamers associated with Activision’s titles are the types of people that live in their parents’ basement until they are 35. That’s an exaggeration, but it gets the image across; Activision Blizzard is known for making games in which people immerse themselves. It isn’t uncommon for customers to spend hundreds of hours playing Activision’s most popular games.

Some of the company’s top titles include Call of Duty and World of Warcraft. These games are what are known as massive multi-player games, as the game allows a large number of users to gather in an online space and play together. One of the company’s newest releases, Diablo III, updates an older, and much loved, game with new features that gamers are raving about. It also adds an interesting auction model that could result in an additional recurring revenue stream for Activision Blizzard.

Players in Diablo basically wander around a virtual world and fight creatures to win gold and somewhat random digital “prizes”. These prizes can be common or rare, and range from potions to scrolls to armor to weapons. For years players have been swapping these prizes in an informal manner. Diablo III brings that trading out into the open with an auction feature—making it easier for players to find people who are looking for items and for people in need of a better sword/armor/etc. to find someone trying to get rid of such items.

This feature is free (and using game currency) for now while the company works out the kinks, but the goal is to allow users to buy things with real money—and Activision will take a cut of every transaction. This is the eBay (EBAY) model applied to digital “stuff”. Talk about a great business model! Program a digital sword, give it out at random to players, let them sell it, and charge a transaction fee.

The best part is that this is something that players will appreciate. Many of the micro-payment focused games on Facebook quickly turn into obvious money grabs, and disenfranchise players in the process. Diablo III, however, is likely to be lauded for taking small amounts of money from its customers on a regular basis. Moreover, this model could probably be applied to other in-house franchises. That could create a nice recurring revenue stream for the company, allowing it to make just a little more money off of its core customers.

Activision Blizzard is a nearly $14 billion market cap company that has offerings from the casual market (Facebook games) all the way through the hard-core game market that Diablo III serves. So the addition of an auction feature in this one game isn’t likely to be overly meaningful to the company’s top line, at least not right away. It is important to note, however, that the company reported that over 3.5 million people purchased copies of the game within the first 24 hours of it becoming available. Within the first week, well over six million copies were sold. Commenting on these results, Mike Morhaime, the CEO and co-founder of Activision’s Blizzard division, said, “We’re definitely thrilled…”. Since Diablo III broke the record for the biggest PC-game launch in history, that sounds like an understatement.

Based on the size of the customer base, even if it takes a little while, the auction feature presents an interesting way to further monetize already popular games in a way that doesn’t alienate customers. As a comparison, consider the furor of customers when even the possibility of Facebook adding more intrusive advertising is mentioned. Or read some of the negative comments on casual iPhone/iPad games about how some games are more about the micro-sale than the enjoyment of customers. The auction feature actually solves a problem for Diablo III customers; it isn’t just another way to force them to pay up.

This clearly shows the power of both a solid franchise and providing customers the best experience. Indeed, people are willing to pay for good experiences. Walt Disney’s (DIS – Free Disney Stock Report) theme parks, hotels, and cruise ships are real world proof of this. It’s expensive to go on a Disney vacation, but a steady stream of people do so every year. Apple (AAPL) is also a good example. Apple products generally cost more than comparable products, but people will line up to get Apple iPhones and typically won’t do the same for the latest Nokia (NOK) smart phone. Ease of use, great customer experience, and giving people what they really want/need is what separates Apple and Disney from the rest. Activision Blizzard is tapping into that model and it has an army of rabid followers dedicated to its products.

Investors should keep a close eye on the switch from “fake” money to real money in the Diablo III auction house. If it takes off, as it seems likely to do, it could start popping up in more of the company’s games (and, perhaps, in its competitors’ games). With more than 20 million customers playing Activision’s other big multi-player games World of Warcraft and Call of Duty, at some point, auction revenues might start to be an important line item for the company.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.